Question

Explain the relationship between total cost, total fixed cost and total variable cost with the help of a diagram.

Answer 1

In economics, total cost (TC) is the full cost a firm pays to produce goods. It is made up of:

• Total Fixed Cost (TFC): This is the cost that stays the same no matter how much is produced. For example, rent or salaries of permanent staff.
• Total Variable Cost (TVC): This cost changes depending on the output. For example, more raw materials and wages for temporary workers are needed when more goods are produced.
• The formula is Total Cost (TC) = Total Fixed Cost (TFC) + Total Variable Cost (TVC)

Diagram:

• The TFC curve is a straight horizontal line because it doesn't change with output.
• The TVC curve starts from the origin and rises with output. First, it increases slowly, then faster. This curve is S-shaped or concave upward due to the law of variable proportions (i.e., increasing and then decreasing returns).
• The TC curve begins from the point where the TFC curve touches the Y-axis. It is shaped like the TVC curve but lies above it because TC = TFC + TVC. The distance between the TC and TVC curves stays the same and equals the TFC.